Tax Considerations for High Net Worth Individuals

Protecting your wealth portfolio requires a calculated tax strategy as a high net worth family or individual. We take a look at some of the options.

While financial status may offer these groups the freedoms that most desire, it certainly doesn’t come without its complexities. Managing and protecting your wealth portfolio may be among the top of your priorities, but without a calculated tax strategy in place, you may lose a lot of money as an individual, or family with a high net worth. We take a look at some of the tax intricacies that can impact the finances of high-net-worth individuals.

Taxes that impact high-net-worth individuals harshly

1. Income tax

The more you earn, the more tax you pay; so as a high net-worth individual receiving an income you would be liable for tax in the highest bracket, up to 37%. But, there are ways in which to reduce your tax liability including certain retirement arrangements or donating to charitable organizations. The costs of earning an income could also be deducted from your taxable income, which is why it is beneficial to consult with a tax expert. They may be aware of tax breaks and deductions that could aid you in reducing your tax liability.

2. Capital gains taxes

As a high-net-worth individual, you likely hold a number of shares and investments. This, after all, is one of the ways in which you can diversify your financial portfolio. But, the sale of investments also means capital gains tax – which can be quite a knock depending on how long you had the investment before selling it. These rates vary from 0% to 15% or 20% depending on the threshold of the proceeds of the sale. High net-worth families and individuals should be aware of the fact that there are a few instances in which capital gains may be taxed at rates greater than 20%, such as:

  • The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
  • Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
  • The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

You can minimize your capital gains tax liability by strategically timing the sale of your investments and using tax-advantaged investment vehicles, or tax-loss harvesting – the process of using investment losses to lower capital gains. It is recommended that you consult with a tax professional to advise you.

3. Estate taxes

When someone dies, their assets become the property of their estate. A deceased person’s estate figures its gross income in much the same manner as an individual. Any income the assets generate becomes part of the estate and may require you to file an estate income tax return. But besides income-generating assets within an estate, estate taxes may be imposed on the transfer of wealth after death. This can hit your estate at up to 40% at the federal level. There are a number of deductions that can be implemented at this level and when preparing your legacy finance portfolio there are estate planning strategies that can minimize the tax liability of your estate as a high-net-worth individual. 

4. Multi-state taxes

High-net earners with income-generating assets across multiple states are subject to state and federal tax laws. Depending on the allocation and apportionment of tax laws per state, they may be hit with double taxation. High-net-worth individuals doing business in a number of states are at risk of a higher overall tax bill, which would require sophisticated estate and tax planning. It is important to consult with a tax expert that understands multi-state taxes for help with this.

Why high net-worth individuals need more than a bookkeeper

High-net-worth individuals often have complex financial situations that require the skills of specialized professionals including CFOs to handle tax and financial advice. With a large number of assets, investments, and properties, their financial management requires careful planning, analysis, and strategic decision-making. A bookkeeper can handle the day-to-day financial transactions and record-keeping, but they may not have the expertise to provide valuable insights or advice on tax planning, investment opportunities, and risk management. Therefore, high-net-worth individuals need a team of financial experts, including accountants, financial advisors, and wealth managers, who can work together to provide a comprehensive and personalized approach to their financial needs.

At Fusion CPA, we can help you manage and protect your investments. We develop winning tax strategies to save family businesses and high-net-worth individuals money, these include developing an estate preparation tax strategy that meets compliance standards, while protecting your wealth while you are alive. Contact us for a consult today.

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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.